If there were one word to describe 2020, “volatile” would be an appropriate description. The coronavirus pandemic wreaked havoc on the U.S. economy. The broader economy remains in a highly uncertain position. With this backdrop, investors may want to position their portfolios to be less volatile moving forward by investing in low-beta stocks.
Low-beta stocks are expected to rise or fall less than the broader S&P 500 index. Moreover, dividend stocks provide investors with returns, even when stock prices are falling. Therefore, investors can reduce portfolio volatility by buying stocks with low beta values, that also pay dividends to shareholders.
Beta is a commonly used proxy for risk. At its core, beta measures how closely (or loosely) a stock price is correlated with the benchmark S&P 500 index. A beta value of 1 means the stock is perfectly correlated with the S&P 500, meaning for every 1% move up or down in the index will be followed by the same 1% move up or down in the share price of the stock in question. A beta value above 1 means the stock will move more than the market in that same direction. For example, a stock with a beta of 1.5 is expected to go up 1.5% for every 1% increase in the S&P 500.
A beta value less than 1 means the stock will move in the same direction as the S&P 500 index, but not as much as the benchmark moves. An example of this would be a stock with a beta value of 0.5 — it is expected to increase 0.5% for every 1% rise in the S&P 500 index.
Finally, a stock can be inversely correlated with the S&P 500 index. This occurs when a stock has a negative beta below zero. If a stock has a beta value of -1, it will decline 1% for every 1% increase in the S&P 500 index (and vice-versa).
Negative beta values are infrequent but are seen occasionally among companies such as mining stocks. Precious metals mining stocks could see their share prices rise as a result of a rise in the price of gold, which often happens during bear markets and recessions.
The bottom line is that beta is a valuable measure for volatility that is worth considering when researching stocks. Investors envisioning a significant move in the stock market one way or another, can reposition their portfolios with beta as a measure of potential exposure. For investors who believe the S&P 500 index is on the verge of another downturn could buy stocks with negative beta, although these are often speculative stocks with questionable fundamentals.
Another approach for investors anticipating a downturn would be to buy stocks with beta values below 1. While these stocks are expected to decline alongside the benchmark, they would theoretically hold up better than the broader market, while providing some positive exposure in case the market continues to increase. Investors can couple low beta values with dividends, to provide the buffer of steady dividend payouts.
In addition to beta, another way to reduce portfolio volatility is to buy dividend stocks. Collecting a steady stream of dividends each year helps shareholders generate positive returns, even in a market downturn. Dividends can offset negative returns when stock prices are falling. As a result, combining low beta values and dividends can produce a portfolio outperform the markets in a recession or bear market.
The following three stocks all pay dividends to shareholders, and have raised them for over 25 consecutive years, qualifying them for inclusion on the dividend aristocrats list. Furthermore, they each have five-year average beta values significantly below 1, meaning if the S&P 500 index declines, they are expected to decline less than the broader index.
Low-Beta Stocks to Buy: Walmart (WMT)
Walmart has a five-year beta of 0.28. Walmart is the largest retailer in the world, serving nearly 300 million customers each week. Revenue will be in excess of $545 billion this year. Walmart has a low beta because it is a highly recession-resistant business. As the king of discount retail, Walmart sees its sales hold up very well in an economic downturn, as consumers often scale down their spending when times are tight.
Walmart reported second quarter earnings on Aug. 18, with results coming in much better than expected on the top and bottom lines. Comparable sales were up 9.3% in the U.S., beating consensus by nearly half. E-commerce sales were up a staggering 97% from the comparable period last year as the company’s heavy push into digital channels continues to pay off. Sam’s Club saw comparable sales rise in the U.S. by 13%, doubling consensus, while adjusted earnings per share came to $1.56 on very strong revenue gains.
Walmart’s competitive advantage is in its enormous size as it can buy and ship product at scales no other company can rival. This allows it to operate with low prices to consumers and as more than half of its revenue comes from groceries, its recession performance is excellent. The company managed to increase earnings steadily during and after the Great Recession of 2008-09.
The company has increased its dividend for over 40 years in a row, and currently yields 1.5%. With a 2020 estimated dividend payout ratio of 40%, Walmart’s dividend is secure, with plenty of room for annual dividend increases to continue.
McDonald’s has a five-year beta of 0.67. McDonald’s is the largest publicly traded fast food company in the world with about 39,000 locations in over 100 countries. Approximately 93% of the stores are independently owned and operated.
McDonald’s third-quarter comparable sales declined 2.2%, due to steep declines internationally, although the company posted 4.6% comparable sales growth in the U.S. The company has held up very well, despite the lingering headwind of the coronavirus which forced many restaurants to close temporarily or reduce service to drive-through only.
Since 2008 EPS has compounded at an average rate of 7% per year. McDonald’s found ways to reignite growth during the past few years, which included new initiatives such as all-day breakfast at its restaurants and expanding the menu through healthier offerings. Another big strategic shift was McDonald’s decision to refranchise many of its restaurants. The company generates lower revenue now (sales peaked at $28 billion in 2013) but its costs have come down to more than offset this top-line drop.
McDonald’s has turned itself into an asset-light, low-cost company that collects franchise fees from a larger number of total restaurants. This strategy has been successful, as earnings-per-share had grown at a strong pace.
McDonald’s has a long history of successfully navigating recessions. It continues to be among the most valuable brands in the world, with significant marketing and advertising investment to maintain its brand strength. It is also a recession-resistant business, as consumers tend to reduce spending on dining out to save money, opting for fast food restaurants like McDonald’s instead of pricier restaurants.
These competitive advantages have allowed McDonald’s to raise its dividend for over 40 years. The company has raised its dividend each year since paying its first dividend in 1976, including a recent 3% increase. Shares currently yield 2.4%.
Clorox has a five-year beta of 0.25. Clorox is a consumer staples company that has performed very well during this time of economic uncertainty. As a major manufacturer of cleaning and sanitation products, the company has seen demand soar during the pandemic.
Clorox stock has increased 39% year-to-date, far outpacing the S&P 500’s 7% year-to-date increase. Clorox has delivered a huge level of outperformance versus the broader market this year, as the company is optimally positioned in terms of its product portfolio.
Just a few of Clorox’s core brands include Clorox bleach and cleaning products, Pine-Sol, Liquid-Plumr, Fresh Step, Glad, Kingsford, Hidden Valley, Brita, Burt’s Bees, RenewLife and more. Its core cleaning product portfolio have registered strong sales growth during the pandemic. These are the products consumers will likely purchase more of during the lockdowns currently taking place across major U.S. cities, in an attempt to stem the outbreak of coronavirus.
Clorox reported fiscal fourth-quarter and full-year earnings on Aug. 3, with results coming in better than expected on both the top and bottom lines. Total sales were up 22% in Q4, driven primarily by double-digit volume growth in all of its reportable segments. The volume gains were due to Covid-19-related consumer spending habits wherein widespread stocking up of cleaning products drove the top line higher.
Earnings came to $2.41 per share for the most recent quarter, compared to $1.88 per share in last year’s Q4. The 28% gain in diluted EPS was due to higher sales and the benefit of cost savings. Clorox management has guided for flat-to-low single-digit sales growth this year.
Clorox’s strong brands are a unique competitive advantage that should lead to continued growth for many years, even in a recession. According to the company, more than 80% of its revenue comes from products that are No. 1 or 2 in their respective categories. These strong brands enjoy steady demand from year to year, even when the economy is in recession, and also provide Clorox with the ability to increase prices on a regular basis.
Clorox has a long history of dividend growth. It has increased its dividend for 43 years in a row, including a 5% increase in May. The stock has a 2.1% dividend yield, which slightly exceeds the average S&P 500 yield of 1.8%.
On the date of publication, Bob Ciura did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.